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Payments on account, sole traders

Payments on account, sole traders

Hello

I have had a call from a sole trader today very angry because they say I did not explain payments on account.  I filed their return and there was no tax to pay. I did mention there could be tax due next year and to put some money aside, ideally monthly.  They said they would have paid something now if they had known, I tried to explain how it works but they would not listen and now want to go to someone else.   Chances are this persons profit this tax year would not even generate much of a tax bill anyway, but there you go.

Anyone else had any problems with this sort of thing ??  I know it is sometimes a shock for people in first year of trading who have a tax liability and also have to make a payment on account!

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By 0098087
16th Jan 2012 13:15

Yes, always the same problem. Easy answer. Put it in a letter advising that there would be a liability the following year and the whole payments on account shbang. They can't say you didn't warn them. Having said that, I always put payments on account detail in the letter with the return and when they get the bill they say you never told me, and you mention the letter and they say, oh, we don't read that!!

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By naive
16th Jan 2012 13:26

Good idea, will definately put it all in writing in future !

Thank you

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16th Jan 2012 14:25

Yes common problem

Whenever we take on self employed people, or any others liable to POAs, our initial proposals & notes set out the rules, with simple examples. 

The classic is where a client doesn't earn enough one year to make POAs only to have a good year next time resulting in a full year's tax plus half again, the following 31 January.  So again we always warn them up front that this might be the case.

It does sound though as though this particular client is over reacting, so probably better off without them?

 

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16th Jan 2012 14:59

All valid points

If the profit for the year was exceptionally high, why not claim to reduce the payment on account when completing the tax return, easy to do and hopefully you'll have some headline/estimated figures to use? 

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By naive
16th Jan 2012 15:16

Thanks, no profit last tax year but I did say there will be tax to pay next time (assuming they make a reasonable profit of course!).  

Yes I believe client is over reacting also , so am happy to refer them to their new accountant.....

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16th Jan 2012 17:03

.

Remember of course you create all the tax laws in the country and the method of administration of them is your responsibility. Moreover if the final tax bill is higher than the amount that any client thought in their head or their mate down the pub said they would have to pay, its all your fault.

So long as you remember those basic facts of life you will be fine.

Wave goodbye, hold the door open nicely and if the new accountant is rubbish they might be back in a year or two, if you want them of course.

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pacta
18th Jan 2012 10:56

How right you are

Every year, every client, every time - if they have a bill it's your fault and you should change the tax laws to suit. What do you mean you can't include all those expenses - my last accountant said......my friend who runs their own company.....but I thought....blah blah!

If they get a rebate though - that is of course due to them, nothing to do with the great tax advice you gave them during the year.....

O the joys of self-assesment (and to be quite honest, corporation tax quite often as well).

 

 

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16th Jan 2012 19:02

@ireallyshould... you have it spot on

Don't take it personal. If you explained it a million times there are always some who would choose not to hear!

Laugh it off and direct them to a competitor so they get the headache in future.

We all get an occasional joker. My favourite was the sole trader (ex-client) who shouted at me and said 'I owe tax??? I only draw £700.00 per week'.

Hands up all those who have a £35K tax free personal allowance :)

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By jford
16th Jan 2012 20:51

Earlier Returns Would Help
We try to encourage all clients to get their tax return done as early as possible in the tax year so that any unpleasant surprises can be addressed in good time. Needless to say it makes little difference but it does allow us a bit of 'I told you so!' when the time comes.

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By ACDWebb
16th Jan 2012 21:57

Point them at

THIS pdf from HMRC. If followed it should mean they have enough put aside by the time the tax becomes payable

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pacta
18th Jan 2012 11:44

I always recommend putting aside atleast 20% (if not 30%) of profits every month. Discuss it face-to-face and then I'd confirm it in writing.

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pacta
18th Jan 2012 11:41

Noooo!

ACDWebb wrote:

THIS pdf from HMRC. If followed it should mean they have enough put aside by the time the tax becomes payable

I've worked all of the figures through in this PDF. Sad, I know, but it was relevant to something I was doing at work. And it DOES NOT take into account POAs becoming due.

HMRC just never get it quite right do they?

 

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By ACDWebb
newGuy
23rd Jan 2012 11:59

@joannenockels84

joannenockels84 wrote:

ACDWebb wrote:

THIS pdf from HMRC. If followed it should mean they have enough put aside by the time the tax becomes payable

I've worked all of the figures through in this PDF. Sad, I know, but it was relevant to something I was doing at work. And it DOES NOT take into account POAs becoming due.

HMRC just never get it quite right do they?

I initially thought that, but actually if you think about it, it does.

If they religiously put money aside based on the PDF, then by the time the tax becomes due on 31 Jan following the tax year they will have retained in the tax year, plus retained between 5 April and following 31 Jan when they actually need to pay the money over, so there should be enough put by for both the tax & the PoA

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JimFerd
24th Jan 2012 14:24

Will that not mean the tax year is historic in comparison to the 'savings period' though? So if you had fluctuations in profitability, your savings might be too much or too little?

And would that not mean that the client were 'chasing his tail' a bit?

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By ACDWebb
lionofludesch
24th Jan 2012 18:01

Yes possibly

joannenockels84 wrote:

Will that not mean the tax year is historic in comparison to the 'savings period' though? So if you had fluctuations in profitability, your savings might be too much or too little?

And would that not mean that the client were 'chasing his tail' a bit?

I think it's only to help as a guide for setting money aside, and it does give a reasonable approximation by the time tax becomes due.

It's not meant to be an exact to the penny set aside, and I suppose if there wasn't enough at the balancing payment date that might be an indication that a claim to reduce payments would be relevant.

If a trader follows it and puts the money aside in a savings account at least it is there to pay the tax.

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17th Jan 2012 12:23

Earlier returns would help nonsense

The only reason accountants want returns earlier is so they get paid earlier. You should only pay for last years accounts when you need the next years. If the accountant is any good he should know your tax position with out accounts and tell you how to reduce your liability or if he is really good you should never have a liability. In fact at times I wonder why I bother with an accountant at all as I could simply make up the figures.

Paying the accountant in January means he has money to pay his tax. If he was paid earlier he would only spend the money. Payments on account mean your accountant hasnt done his job properly.

On a seperate note have the Revenue gone on strike? 2 hours spent trying to get through to 3 different departments with out any success. I'm going to the pub for lunch (might get some good advice there)

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By ACDWebb
Brunel
17th Jan 2012 12:31

'

edward33 wrote:
On a seperate note have the Revenue gone on strike? 2 hours spent trying to get through to 3 different departments with out any success. I'm going to the pub for lunch (might get some good advice there)
Yes - see HERE

 

As for the rest

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By jford
Brunel
17th Jan 2012 12:39

The pub

You might meet our client who was so delighted that he didn't have to pay tax on a bad debt that he asked, in all seriousness, whether he'd be better off if he never got paid. 

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By DMGbus
Brunel
17th Jan 2012 13:36

Earlier accounts & tax preparation definitely better for client

Experienced accountants know that their clients income can vary enormously year on year, therefore so can their tax liabilities.

Some taxpayers think their accountants have a crystal ball and know how much profit is being made before the accounts are drawn up! ( I suppose plausible with some definitely "never varies" income level trades, but in my 37 years practical experience these are rare ).

Here's an actual current example where earlier accounts preparation is strongly advised:

y/e 31 March 2010 : Profits made £65,000

y/e 31 March 2011 : Profits made £84,000 - a partnership of three, tax liability approx £17,000 (incl Payments on a/c).   When I told them last week about this £17,000 to pay I was told that they only had £5,000 in the bank!   Now, had the books come to me in June, I could have told them in July about this month's £17,000 tax bill and they'd have had 6 months to save up towards it.  As it happens the books came to me just before Christmas so they've got just 3 weeks notice of their tax bill.  Maybe they'll at last learn the lesson that books should come in much sooner than December, or I wonder if they like Edward33's advice [see below] instead?

As for accountants wanting early books to get paid early this has NEVER occurred to me and is to me irrelevant - most important issue is providing a useful service to the client - much easier in July than in January as in the quoted example.   As for having an accountant who shows you Edward33 how to pay no tax by making up figures then perhaps such an accountant is one who's just been jailed:

http://nds.coi.gov.uk/clientmicrosite/Content/Detail.aspx?ClientId=257&NewsAreaId=2&ReleaseID=422831&SubjectId=36

========================>>   here's Edward33's views (I hope he was joking!):

 " Earlier returns would help nonsense edward33 PM | Tue, 17/01/2012 - 12:23 | Permalink

The only reason accountants want returns earlier is so they get paid earlier. You should only pay for last years accounts when you need the next years. If the accountant is any good he should know your tax position with out accounts and tell you how to reduce your liability or if he is really good you should never have a liability. In fact at times I wonder why I bother with an accountant at all as I could simply make up the figures.

Paying the accountant in January means he has money to pay his tax. If he was paid earlier he would only spend the money. Payments on account mean your accountant hasnt done his job properly."

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17th Jan 2012 12:43

Ouch(ish)

edward, sound like you've not met the right accountant yet or maybe it's a case of going back to bed, leaving it 10 mins and getting out the other side?  Anyway, just in case you were serious, read on.

Given that my clients, who I think are pretty representative, have profits & income that go up & down like yo-yos, it is in their interests to get their numbers crunched asap in order to plan their tax bills and to know whether the POAs are right or not.  It is also in my interest because with 98% of my Ltd company clients having 31 March year ends 75% of the client work this office churns out revolves around 31 December & 31 January deadlines and I refuse to work all hours at that time of year because clients can't be bothered.

The last two tax returns I did showed personal income from untaxed income of over £200K and I defy any accountant to help them avoid POAs unless of course they are prepared to cover client's interest and penalties.

Like normal folk I have a mortgage to pay and so need payment as I provide the services, consequently all my clients pay monthly throughout the year, whether they have provided me with the information or not, no complaints yet.

If that's all waffle & water off a duck's back then I would agree with you, you are better off making up your own numbers.

On the HMRC strike subject, yes, go to the home page to find out why.

 

 

 

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17th Jan 2012 13:50

haha ... you have been well and truly 'had'

edward33 is an accountant (according to previous posts) so I think he is just 'avin a larf', and maybe quoting the excuses he gets from his clients.  ;)

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17th Jan 2012 15:28

Fair dos

I did wonder but needed to vent so no harm done.  I'll expect something even better from Ed on 1 April.

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17th Jan 2012 18:14

Flash was right

You have to be up early to get one over Shirley or even the alto ego Shirely. Sorry Paul we vent in different ways will think about 1 April.

No advice given or received in pub but jfords comment got me thinking what with 50% tax and 2%NIc and poa there may be something in that one:)

DMGbus hope you didnt go to all that effort for me sorry again....only have 2 more to go and then on to proper work.

 

 

 

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17th Jan 2012 20:09

Limited

I have found that one of the selling points of moving a client over to LTD status is the disappearance of the dreaded POA. 

Corporation Tax is so much simpler for the little dears to grasp.

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By cfield
johngroganjga
18th Jan 2012 12:03

"Disappearance of the dreaded POA"

Just for the benefit of any non-accountants reading this strand, please don't imagine your POAs will disappear if you switch to a limited company. If you go down the usual route of low salary and high dividends, you will have to pay 25% tax on all money extracted from the company over and above the higher rate threshold (unless you treat some of it as a loan which has other tax implications).

So you may very well have POAs to pay during the year. Don't rely on corporation tax to discharge your whole tax liability.

I always advise clients who are higher rate taxpayers (or likely to be) to save 25% of their dividends towards tax. That covers their liability and usually leaves cash over to spend as they wish, which always pleases them and avoids nasty surprises.

And if there is a high goodwill figure on incorporation, there will probably be a capital gains tax bill which is it best to pay up front via POAs.

Of course, Sherman in perfectly correct in the great many cases where profit before tax is around the £50k mark - or even more where husband and wife share dividends.

Chris

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18th Jan 2012 11:14

@sherman

You are absolutely right and Corp Tax is payable 9 months (and 1 day) after the year end.  It is a shame that a self-employed income is not given the same payment options.  There is a great cashflow advantage of "converting" to Ltd company but for those living hand to mouth S419 can negate any benefit.

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18th Jan 2012 11:24

can be extreme

Not being an accountant but a software supplier, I still thought I would contribute as I saw an extreme case a couple of years ago.

Despite a large "balance of tax due" each year of £120,000 (from investments) - no payments on account had been due for several years as a smidgen over 80% of tax had always been paid at source - mainly due to a very substantial (£1m+) PAYE income. One year, a slight increase in investment income of only a few hundred pounds pushed it under the 80% and so POA were then due.

An extra £60K+£60K of POA to find on top of the £120K balance of tax. When did this come to light -- Jan 27th. Ouch.

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18th Jan 2012 11:43

This thread

Made me smile for many many reasons. Ed - brilliant but it was a bit too far out there to be a client....

Sherman, I agree on one front, but if they don't understand the words "IT'S NOT YOUR MONEY" (Client response - "What do you mean it's not mine - I earned it") stay far far away - applies to a few of mine.

Loved Dave's example.

Ok back to work!

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18th Jan 2012 12:56

Now try explain this one

An underpayment caused partly by an in year PAYE refund pushing the amount into payment on account territory. The refund of PAYE was caused by HMRC telling pension provider to include a previous employment that never existed. All HMRC error but they have run away and left me to explain.

or

huge bill and payments on account caused by HMRC assisting to reduce last years payments on account to £nil (hello) ? I can see I am going to have fun (not) when or if the penalties are issued....hopefully there are non due if HMRC did not advise correctly.

Clients usually shout at you if you have overcooked this (on their insistence after health warning issued) and there is some interest to pay.

Thinking about it is this the way to deal with these matters.....get client to phone HMRC get them to advise of reduction of payment on account....hey presto....not us gov......No penalties perhaps ?

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18th Jan 2012 14:07

@the black knight

"payments on account caused by HMRC assisting to reduce last years payments on account to £nil "  --- how does this affect the POA payable in Jan ? Huge bill yes, but POA ?

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18th Jan 2012 14:23

why ?

Would you quote part of a sentence ? But you are right, my grandma could have been better.

Client does now have the bill (shock) that should have already have been paid + next years payment on account (which was due anyway) which effectively doubles the shock factor !

The icing on the cake is now that it was done once "can't I do it again."

and as we did not make the claim to reduce has taken a bit of figuring out where the payments on account disappeared to.

No body gets payments on account normal fashion let alone when there are added complications...........one thing for sure is that you and I will be first to receive the outpouring of grief caused by the emotive issues of not having enough money to pay the tax bill.

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18th Jan 2012 15:21

sorry I misunderstood

I thought you were saying the last year's POA affected this years. I quoted the bit of the sentence I did not understand. I was concerned I had missed something sinister !

I agree POAs are a nightmare, particularly for the beginning self-employed.

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19th Jan 2012 12:42

Start ups

When advising a start up business, I lean on them very hard to come to me at Easter in the first year so that I can get a fix on thier profit and tax payment for the following January. I try to repeat the pressure the following April so that once profits come on stream I can set out tax liabilities for them.

One thing I have found effective is to make out flourescent post its one for each payment date showing date due and amount. I stick these on the front of the package for signature and go through it with them. Some chuck em away, but some stick em on calendar / in diary; reduces the stress levels in Jan. Somewhere along the line of course they slip back to January and we have this wonderful frantic time.

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19th Jan 2012 14:36

same culprits every year

Begged, pleaded sold my soul to the devil....none of it worked !

and if you notice they also have missing records, poor memories and think a picture is better than a number.......

oh and it's only a small job.............being the only client of course.

or maybe I am Mad !

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23rd Jan 2012 11:58

Black Knight

Dont forget always slow at paying your bill

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By ringi
23rd Jan 2012 12:08

An employee has to pay the tax at the time they get the income..

Explain to them that an employee has to pay the tax at the time they get the income, but as a sole trader they are being given a lot longer to pay by the government. 

However the government does not wish to wait until 18 months after the sole trader has been paid before getting some tax.   So the HMRC uses the past complete set of account to get some ideal what profit will be made over the current year and expects half to be paid something like 6 months after the trader has got the money.

Once I understood the above, I did not see payment on account as being as unfair.

(They go into details after they have understood the why)

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23rd Jan 2012 12:14

Juggling

Small business often has to juggle all of its payments to survive, especially since the banks stopped lending....

payments on account just take away cashflow for business growth.....

government seem to have missed the point that that is what the economy needs as they have been preoccupied with building buildings that no one needs or were not wanted by the time they were finished etc etc etc.

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By ringi
Paulsoper
23rd Jan 2012 12:42

But all good parents teach their children that they have to set aside money to pay what they own to other people, then only use the remaining money for themselves.   Using someone else’s money for “cashflow” then complaining when it has to be paid over just does not make sense.

That is no different than claiming you can’t pay the rent as you spend the money on the children’s presents and that the landlord is just messing up your cashflow by wanting the payment on time.

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23rd Jan 2012 13:15

then

just get a job...preferably for the government.....they really know how to milk it

No need to risk your house of have the hassle of employing anyone.

The advantages set out in the legislation for the self employed were presumably to stimulate business...and in recognition of the risk entrepreneurs took........but as these advantages are no longer necessary as small business is not wanted.....Unless you are a delinquent baby factory as the child tax credits industry is the one to be in at the moment.

It is about time small business was entitled to credit easing, instead of the banks....but I guess the banks needed paying for taking the blame for the government crashing the economy.

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